Crude Oil Market Analysis

Crude Oil Market Analysis (1/10/07)

Today the market action followed the forecast of the Crude Oil Market Analysis (1/09/07) (the “Jan. 9 COMA”).

The Jan. 9 COMA stated that “overall in tomorrow’s DOE report, unless the crude import falls to 9.5 million barrels per day or lower, the continued build in gasoline and distillate stocks will more than offset the draw in crude oil stocks and pressure the crude oil market towards $55.00. Once the market breaks $55.00 to touch $54.70, it will be a free fall towards $50.00-$50.40.”

The Jan. 9 COMA called for the effect of a significant build in product stock to offset the effect of a large draw in crude stock. Today the market heeded the gasoline build of 3.8 million barrels and distillate build of 5.4 million barrels while shrugging off crude draw of 5.0 million barrels.

The Jan. 9 COMA also called a crude import at 9.5 million barrels or below as the saving grace for the market’s continued downward trend. After the initial reaction to the DOE report, the market did bounce off from $53.89, one cent above the Jan. 9 low and an 18-month low of $53.88, as the market was mindful of the crude draw of 5.0 million barrels. But as soon as it became clear that the market could not rally above $54.85, the 2006 low, the market continued its downward trend and settled at $54.02.

Currently the market trades at $53.22 after reaching a low of $52.94. This is not surprising as the Jan. 9 COMA called for “a free fall” if the market would drop to $54.70.

Fundamentally, without a prolonged cold weather arriving by Feb. the market is slightly off balance at $53.22 with a downside risk towards $50.00.

So far no news can be substantively interpreted as bullish. On Jan. 9 Qatar’s oil minister’s talk of an early implementation of the 500,000 barrels per day cut failed to sustain a market rally from an 18-month low. The dispute between Belarus and Russia that first gave the market a boost on Jan. 8 has since been resolved between the two countries’ presidents.

Today Saudi Arabia announced cut in Feb. oil allocations to its Asian customers in China, Japan, and South Korea by 12%-14%, larger than the contractual limit of 10%. However, just as Saudi Arabia could not help bring down the oil price last July because the world did not need its sour crude, now Saudi Arabia cannot boost the oil price because its cut to its Asian customers is also mostly sour crude. Moreover, Saudi Arabia has announced no change in allocation to its U.S. customers.

It appears that Saudi Arabia is the only OPEC member who truly implements its share of OPEC’s announced cut. As the market drops below $55.00, instead of cutting productions now, most other members of the OPEC will likely increase productions—or at least keep productions steady. Based on game theory, if one member thinks that all the other members will be serious about cutting oil productions only if the price falls below $50.00, and every member except Saudi Arabia has the same strategic thinking, as the market falls below $55.00, it is the “catch-the-last-train” mentality because every member except Saudi Arabia will try to sell as much oil as possible while the price is still above $50.00 before they all recognize that at $50.00 per barrel or below they all have to cut productions in real term or they all will sink. Therefore, as the market trades below $55.00, it is unlikely that OPEC members will truly cut productions until the market falls below $50.00.

The OPEC production cut is the only potential bullish factor in sight, and it is not credible until the market drops to $50.00 or below.

Technically speaking, there may be a rather strong support at $52.50, as the market at $52.50 would have retraced by 38% from its high of $78.40 in the most recent bull market starting from 1998’s low at $10.32 to 2006’s high at $78.40.

I do not fully understand the significance of the 38% retracement, and I want to invite anyone who has such an insight on the significance of the 38% retracement to post a reply with an explanation.

Strategy: Hold short at $54.75 with a stop at $55.65; take profit below $50.40.

Dr. Chen

 

Thank you for your interesting posts.
May I suggest you keep them in one thread so we may follow the entire discussion easier.

 

Upon your kind suggestion, I will post all my future Crude Oil Market Analyses under this thread.

For the convenience of my readers, I will consolidate all my previous Crude Oil Market Analyses under this thread as well in a chronological order, each as a separate reply to this thread.

Thank you for your suggestions. Please bring more ideas as you see appropriate.

Dr. Chen

 

Crude Oil Market Analysis (1/6/07)

From January 6, 2007 I will begin to post my analysis of the crude oil futures market traded on the New York Mercantile Exchange. The posting will be made on an "as-necessary" basis.

On Fri., Jan. 5 the crude oil futures market clearly ran into a strong support at $55.00 and closed at $56.31, $1.41 higher than the day's low of $54.90. The weekly continuation chart for the front-month crude oil futures shows that the market has been holding above $55.00-$55.50 support fairly well since the week ending on July 1, 2005. The market will hold above $55.00-$55.50 support again this time even though the market sold off on Wed. and Thurs. for a $5.48 loss for the biggest two-day drop since the $5.88 drop on Dec. 1 and Dec. 2 of 2004 as if today were sometime in March with the winter already behind. But the winter will arrive, and the market will rally on the forecast of any cold weather arrival. Moreover, the geopolitical tensions in Iran, Nigeria, Iraq have shown no sign of abating. These geopolitical tensions along with OPEC's proclaimed 500,000 barrel per day production cut to be implemented on Feb. 1, however incredible it may be perceived by the market, will provide support for the market at $55.00.

In the near term the market will again trade sideways as it did between Nov. 28 and Dec. 22 at $60.50-$64.50, except that the market will trade in the range of $55.00-$60.00.

Strategy: Long at $55.70 or below with a stop at $54.40; take profit at $59.50 or above. (Maximum risk $1.30, minimum expected profit $3.80).

Dr. Chen

 

Crude Oil Market Analysis (1/8/07)

Today the market traded in a $2.62 range between $57.72 and $55.10 only to close 22 cents lower at $56.09 because the market, on an intra-day basis, has no directions.

Other than the geopolitical tensions--today it was Belarus--and the OPEC jawboning that the Jan. 6 commentary already discussed, the only new material information appearing today is the CFTC's COT report. The COT report reflects the market sentiment that displays a serious warning to anyone who dares to be long in the crude oil market because it shows that during the week from Dec. 26 to Jan. 3 in which the market dropped $2.78 to close at $58.32, the non-commercial longs have shrunk by 17,654 contracts to just 2,194 contracts amidst aggressive new shorts coming in as open interest increased by 46,748 contracts. The market has since dropped by another $2.23 to close today at $56.09. It is a fairly accurate statement to say that by the end of today the non-commercial interests are net short.

Today the market tried to break $55.00 support, but it seems that all the longs that should have been out have already been flushed out after last Wed.'s $58.32 closing, and all the shorts that should have been in have already jumped in the bandwagon since the market broke $60.00 support last Wed., so no new shorts were coming in as the market approached $55.00. Therefore, the market held firm at $55.10 and closed nearly $1.00 higher at $56.09.

The front-month crude oil contract held above $57.30 in the entire month of October except on the date of expiration on Oct. 20. Therefore, $57.30-$57.50 was an important support and is now a resistance. The market now needs to close above $57.50 in order to rally back to $60.00.

Tomorrow the market will again under pressure for two reasons. First, gasoline and distillate inventories are expected to build in Wed.'s DOE report. Also, the EIA's Short-term Energy Outlook will likely lower its estimate of the 1Q WTI price and of the distillate oil demand due to the record-setting warmth so far this winter.

Strategy: Hold long at $55.70 with a stop at $54.40; take profit above $59.50.

Dr. Chen

 

Crude Oil Market Analysis (1/9/07 a.m.)

Now that the market has convincingly broken $55.00 support to a low of $53.88, sell short at market currently at $54.75 with a buy stop at $56.25, take profit at $50.50 or below. I will provide a full analsysis at the end of day.

Dr. Chen

 

Crude Oil Market Analysis (1/9/07 Updated)

Today the market is in a state of confusion, as it struggles to decide whether to bottom out at $55.00 or to break away towards $49.75.

Today the market finally broke the 2006 low of $54.85 and had a follow-through selling of almost $1.00 to a low of $53.88. This $1.00 follow-through selling shows that the drop to $53.88 was not a normal panic selling triggered by stop-loss orders, but that there were new shorts coming in after the market broke the support. In other words, the market wanted to go lower.

However, the market could not stay below the 2006 low of $54.85 and retraced back to the previous support above $55.00. Once the market retraced back above the previous support, the shorts who jumped in after the market broke the important $54.85 support ran for cover and pushed the market above the day’s high of $56.15 to a high of $56.20. Once the shorts covered, the market settled back down to $55.63 for a $0.45 loss for the day.

The market action would have clearly shown that the market had bottomed out at $55.00 if the rally back above $55.00 from $53.88 had been purely technically driven. However, the rally was event-driven, caused by the announcement by a minister of a member country of the OPEC—not even an official OPEC announcement--that OPEC will begin to implement the 500,000 barrels per day cut originally scheduled to start on Feb. 1 immediately. The 10 OPEC countries cut production by approximately 700,000 barrels per day in November 2006 out of the 1.2 million barrels per day they had announced in October. Then in December the 10 OPEC countries maintained the same production level according to the EIA, increased production by 100,000 barrels per day according to Petrologistics, and increased production by 75,000 barrels per day according to the Dow Jones survey. Given OPEC’s compliance record, after the initial knee-jerk reaction the market can hardly reverse its downward trend by OPEC’s unofficial talk.

Other than OPEC’s unofficial announcement, the other material information coming out today is EIA’s Short Term Energy Outlook. The Crude Oil Market Analysis for Jan. 8 predicted that “the EIA's Short-term Energy Outlook will likely lower its estimate of the 1Q WTI price and of the distillate oil demand due to the record-setting warmth so far this winter.” The EIA lowered its forecast for WTI price in 2007 to $64.42 from December’s forecast of $65.00. The EIA also lowered its forecast for the U.S. demand for crude oil in 1Q and 2007 by the same 0.6%. Due to the miniscule scale of EIA’s downward revision, the EIA’s Short Term Energy Outlook did not have any impact on the market.

Tomorrow’s DOE report will likely reinforce the market’s trend towards $50.00 primarily because of ample build in gasoline and distillate stocks.

First of all, refinery utilization rate will likely fall as refineries start maintenance after the New Year in preparation for spring operation. Whether crude stock will increase or decrease depends on the level of import, which is notoriously difficult to predict. The Bloomberg survey’s forecast of a draw of 1.5 million barrels is within the ballpark figure.

The gasoline import will likely drop from last week’s 1.254 million barrels per day to a more seasonal 1.0 million barrels per day, but such a drop will be matched by a drop in demand to just below 9.1 million barrels per day after the holiday season ends. As a result, the Bloomberg survey’s forecast of a draw of 2.6 million barrels and Reuters survey’s forecast of a draw of 2.3 million barrels are within the ballpark figure.

The distillate import will likely edge up a little to above 400,000 barrels per day from last week’s 385,000 barrels per day, and the demand will likely fall to just above 4.0 million barrels per day due to the record-setting warmth in the East Coast. As a result, the distillate build will likely be approximately 3.0 million barrels rather than 2.0 million barrels forecast by Bloomberg survey and 2.1 million barrels forecast by Reuters survey.

Overall in tomorrow’s DOE report, unless the crude import falls to 9.5 million barrels per day or lower, the continued build in gasoline and distillate stocks will more than offset the draw in crude oil stocks and pressure the crude oil market towards $55.00. Once the market breaks $55.00 to touch $54.70, it will be a free fall towards $50.00-$50.40.

On the up side, the market needs to trade above $56.20 in order to break away from the magnetic force of $55.00 that holds the market towards $55.00.

Result of previous trade: Long established on Jan. 8 at $55.70 was stopped out today at $54.40 for a $1.30 loss.

Strategy: Hold short at $54.75 with a stop at $56.35, take profit below $50.50.

Dr. Chen

 

Crude Oil Market Analysis (1/11/07)

Today the market continued its downward trend after another rally failed in the wake of OPEC’s appeal to its members to comply with their respective production reduction quotas.

The market reached another 19-month low overnight to hit $52.94 but rallied on OPEC’s appeal to its members to comply with their respective production reduction quotas. However, once it became clear that the market was unable to rally above the 2006 low of $54.85 in light of the estimate by Oil Movements that OPEC production will increase by 350,000 barrels per day in Jan. from its Dec. productions, the market continued its downward trend to hit another 19-month low at $51.80 before closing at $51.88.

Today’s market action is consistent with the Jan. 9 Crude Oil Market Analysis that “once the market breaks $55.00 to touch $54.70, it will be a free fall towards $50.00-$50.40.” This point is echoed by Barclay’s technician Philip Roberts in London, who said that “a pivotal moment in oil's decline so far this month is its passage through $55, and subsequently the lows of 2006, implying further near-term weakness.”

Fundamentally the market is very weak and shows no sign of bottoming out. Technically, however, the 14-day RSI for the Feb. contract is currently below 30, which indicates that the market is oversold.

Currently the market trades 83-cent higher at $52.71. The bounce is not alarming to the bears, since the market dropped rapidly to $51.80 after breaking $52.94 and has not traded in the $51.80-$53.00 range before.

Tomorrow will be an inside range day. The market will trade between $51.80 and $53.90, as some shorts cover to take profit.

Strategy: Hold short at $54.75 with a stop at $55.00 in case the market rallies above 2006 low of $54.85; take profit below $50.40.

Dr. Chen

 

Crude Oil Market Analysis (1/12/07)

Today the market action followed yesterday’s forecast. Yesterday’s forecast called for a technical bounce based mostly on the 14-day RSI being below 30.

Overnight the market bounced from yesterday’s closing price of $51.88 to a high of $52.94 but opened in pit trading lower at $52.20. Then the market bounced off the day’s low of $51.56 and steadily climbed up to break the early high of $52.94 to a high of $53.11 before settling at $52.99.

Today’s market bounce can be contributed to technical reasons, one being that yesterday the 14-day RSI had fallen below 30 to around 26 thus signaling a recovery soon, the other being that those shorts who came in later this week would want to take their profit and cover their positions before the three-day weekend due to the Martin Luther King holiday on Monday. The OPEC’s “consultation” among themselves about a possible emergency meeting (another in as many as three months?) also helped to assuage the overwhelmingly negative market sentiment a little. As a result, the market bounced back by $1.11.

However, although the front-month Feb. contract bounced back by $1.11, the contracts for the distance months of Dec. 2007 and Dec. 2008 bounced back by more modest 51 cents and 33 cents, respectively, indicating the market’s expectation of continued ease in the global supply of crude oil in the two years ahead.

Today CFTC’s COT report further confirmed the market’s bearish trend. The COT report shows that for the week ending on Jan. 9, the non-commercial interests had gone from a net long of 2,194 contracts to a net short of 22,358 contracts, a whopping change of 24,552 contracts amidst an increase of 53,651 new open contracts. In other words, all the money that was on the long side last year is now aggressively jumping in to the short side, further reinforcing the market’s bearish trend.

Nothing in the market fundamental has changed today, and nothing has emerged to convince the market that a bottom has been reached. To make the matter even worse to OPEC, if OPEC should announce a cut for the third time in as many as three months while still failing to accomplish the initial cut of 1.2 million barrels, the market will simply ignore the “wolf story” and continue the downward trend until….?

Strategy: Hold short at $54.75 with a stop at $55.00; take profit below $50.40.

Dr. Chen

 

Explanation of crude prices:

http://www.marketoracle.co.uk/Article211.html